Does Android dream of profit?

A Google Android figurine sits on the welcome desk as employee Tracy McNeilly smiles at the new Google office in Toronto, November 13, 2012.

MARK BLINCH/REUTERS

OMAR EL AKKAD

TECHNOLOGY REPORTER

March 25, 2017March 9, 2014

To understand both the massive popularity and limited profitability of the world's most widely adopted operating system, consider the biggest piece of news from last month's Mobile World Congress, the mobile industry's biggest trade show: A $25 (U.S.) smartphone.

Mozilla, the maker of the popular Firefox web browser, stole the show by announcing plans to build an ultra-low-cost phone running on an operating system similar to Firefox.

The news was especially shocking because, at such a low price point, the smartphone may well pose a serious challenge to Google's Android operating system – the software that powers about eight of every 10 smartphones and tablets sold anywhere in the world. But, even as companies such as Samsung have made billions from Android-based phones and tablets, Google continues to generate nowhere near as much money from the software it invented.

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Call it the Android paradox: Over the past seven years, Google has built perhaps the fastest-growing operating system in history. But despite its market share success, Android's primary revenue source has been a similar (but generally less profitable) variation of the search advertising model Google uses on its traditional search engine. Google doesn't reveal revenue figures for its operating system.

"Android has become quite pervasive on all manner of devices, from smartphones to tablets to connected devices," mobile industry consultant Chetan Sharma said.

"Underlining all that was the strategy that if you have more smartphones on a network, people are going to use the [smartphone] browser more, and usage of the browser translates to search revenue. But the world didn't grow as Google expected."

Instead of using the browser, Android users are more likely to use apps.

As companies such as Microsoft struggle to gain market share (and BlackBerry, the original inventor of the smartphone, struggles to simply maintain relevance), the smartphone and tablet industry is today controlled by two platforms – Google's Android and Apple's iOS.

But Google and Apple have taken entirely different approaches. Apple has refused to make iOS available to any third-party manufacturers at any price, whereas Google allows anyone to use and customize Android for free. As a result, Google now dominates in volume, with about 80 per cent market share in both global tablet and smartphone sales. Apple, on the other hand, keeps about half of all smartphone industry profits – about $32.5-billion of the $57.6-billion total in the last quarter.

Google's market share can be broadly split into two categories: high-end devices, where a single player – Samsung – effectively owns the market, and low-end phones, where myriad manufacturers compete at generally low margins. (A Google spokesperson declined to provide comment for this story).

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Android's success in the low end of the smartphone and tablet markets has had a number of unintended consequences. Outside of Samsung, many of the device manufacturers that build Android-based units (including a number of players in the massive Chinese market) specialize in extremely low-margin products. As such, those companies are likely to balk should Google ever try to institute Android licensing fees.

A more amorphous side-effect of Android's low-end dominance is the impression among many industry observers – be it real or perceived – that Android users are less likely to spend money under any circumstances, especially compared to consumers who are willing to pay premium prices for Apple devices.

In October of last year, ad buying firm Nanigans released a controversial study that seemed to confirm these suspicions. The company studied data from some 200 billion Facebook ads, looking at the value for money on ads that ran on Android and iOS devices. The results were stark: Facebook ads that ran on Apple's platform were 1,790 per cent more profitable than those that ran on Android.

"You know Google is trying," said Ronald Gruia, director of emerging telecom at Frost and Sullivan. He pointed to the company's recent efforts to make its users more comfortable with spending money, such as the Google Play music store. "But I don't expect Android users to ever monetize the same way as Apple users."

Today, Google's monetization challenges can be seen most clearly in the booming Chinese market. Officially, Google has little presence in the country. But via the dozens of manufacturers who use customized versions of Android to build cheap smartphones, the company has a huge, largely unprofitable user base.

"Google is its own worst enemy," said technology analyst Kevin Restivo. "The share in China is incredible and yet very de-monetized. Chinese players have no interest helping Google monetize."

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And because each of those players is free to customize the Android software as they see fit, the proliferation of low-end Android devices is contributing to what is perhaps the biggest criticism of the software – that there are far too many different versions of it in the marketplace.

"Android is still highly fragmented, and it's getting worse," said Ted Schadler, principal analyst at Forrester. "We're seeing different versions of Android … coming from device makers in China, for example. Because it's open source software, Google can't control every aspect of it."

Given the massive size of Android's user base, both the issues of monetization and fragmentation are extremely difficult to fix in the short-term. Indeed, Google instead appears to be doubling down on its strategy of winning the mobile wars through sheer volume.

As Mr. Restivo notes, the company's recent $3.2-billion purchase of home-automation startup Nest opens the door for Google's operating system software to expand to an entirely new category of connected devices – from thermostats to refrigerators. Should such a future materialize, Android could morph from the software that powers the mobile world to the software that powers the world.

"The Android effect on the world has only just begun," Mr. Restivo said. "A lot has to happen, but what Google has is the ability to roll out services quickly, the ability to create new product categories."

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